26 Oct Should You Use an S Corp to Save Money in Self Employment Taxes?

My self-employed clients often ask me about what an S Corporation is and how it can save them money.  Overall, an S Corporation is a formal entity that allows a business owner to become an owner-employee.  Setting up an S Corp can save tax money since any funds that are not paid to the owner-employee are not considered to be self employment income subject to the 12.4% social security and 2.9% medicare self employment tax.

Yet, S Corporations require additional compliance.  Any company utilizing an S Corp must be prepared to do the following, at a minimum:

1. File an additional tax return – 1120-S – that is due a month earlier than the 1040;
2. Maintain an organized set of books (although sole proprietorships should be doing this anyway);
3. Set up and regularly run payroll for the owner-employee;
4. Perform a “Reasonable Compensation Study” to make sure that the owner-employee’s salary is reasonable;
5. Properly document any reimbursements made to the owner-employee to cover their expenses;
6. File any documentation correctly to show the IRS that the entity has properly elected S Corporation tax treatment.

Are you interested in learning more?  Reach out to Lipkin CPA PLLC, and we can help you determine if the S Corporation is right for you.